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What is a Variable Annuity?

We briefly touched upon the variable annuity in a previous article, but let’s answer fully the question “What is a variable annuity?” Unlike the fixed annuity, which guarantees a payout based on a promised interest rate, the variable annuity has no guarantee of interest rate.

The variable annuity is tax-deferred, meaning that until you close out the account or begin withdrawing payments, you will not have to pay taxes on your earnings. This type of retirement vehicle is beneficial because you can continue earning interest on what you would have lost to taxes in other types of investments.

Other Details of the Variable Annuity

The key difference between the fixed annuity and the variable annuity is of a guaranteed payout. The reason a variable annuity can’t offer a fixed interest rate is because it allows you as the investor to select from a choice of investment types. These will all perform differently over time and their performance will directly impact the amount of money you will be paid in retirement.

Choosing the variable annuity is more risky than choosing a fixed annuity. With a fixed annuity, an anxious investor can rest calmly in knowing that they will be guaranteed a certain amount of money at least before they cash out.

However, he who chooses the variable annuity is willing to place a bit more risk on his or her investment in order to have the potential to earn even greater amounts of income. But they also risk the possibility of losing money as well. This is why it is extremely important to do your prior research before committing to a specific investment.

What is interesting is that you will be given options for your investment. You can choose stocks or bonds in subaccounts that are very similar to mutual funds. They will have preselected individual stocks and bonds chosen for you in order to maximize and average out performance for the most beneficial gain, but of course the market cannot be perfectly predicted in the long-term either. Your investment company will likely offer you from as few as six to as many as twenty subaccount options.

Variable Annuity Possibilities

This type of investment will have an opportunity to grow faster than the rate of inflation, in which a fixed annuity is promised to not be able to keep up. But again, there is always the potential for loss as well. Always do your research and arm yourself with as much information as possible to defend yourself against loss and to increase the chances of financial gain.